Market Snapshot
briefing.com
| Dow | 33588.31 | +314.25 | (0.94%) | | Nasdaq | 12151.21 | -70.70 | (-0.58%) | | SP 500 | 4120.20 | +9.62 | (0.23%) | | 10-yr Note | +3/32 | 3.43 |
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| | NYSE | Adv 1514 | Dec 1424 | Vol 950 mln | | Nasdaq | Adv 2125 | Dec 2361 | Vol 4.7 bln |
Industry Watch
| Strong: Energy, Materials, Health Care, Consumer Staples, Financials, Communication Services, Industrials |
| | Weak: Real Estate, Utilities, Consumer Discretionary, Information Technology |
Moving the Market
-- OPEC+ announcing a surprise 1.16 mln barrel per day production cut starting in May and to last through end of 2023
-- Treasury yields moving lower
-- Weakness from a few mega cap stocks
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Closing Summary
03-Apr-23 16:30 ET
Dow +327.00 at 33601.06, Nasdaq -32.45 at 12189.46, S&P +15.20 at 4125.78
[BRIEFING.COM] The stock market kicked off this holiday-shortened week with mixed price action. There was not a lot of conviction in the market except for oil-related trades following the surprise announcement that OPEC+ will cut production by about 1.16 million barrels per day starting in May and continuing through the end of the year.
WTI crude oil futures rose 6.9% today to $80.60/bbl, helping to drive a nearly 5.0% gain in the S&P 500 energy sector. Dow component Chevron (CVX 169.95, +6.79, +4.2%) was among the more influential winners in that regard.
The main indices traded in fairly narrow ranges today, featuring the outperformance of the Dow Jones Industrial Average throughout the session. The S&P 500 climbed to 4,127 in early action but gave back those gains and then some as it slid to 4,098 before staging an afternoon push that left it close to its high for the day by the closing bell. The Nasdaq for its part languished in negative territory throughout the day, but ended well off its worst levels as mega cap stocks pared larger losses in a late afternoon advance.
Tesla (TSLA 194.77, -12.69, -6.1%) was a notable laggard from the mega cap space, falling more than 6.0% today after reporting Q1 production and delivery numbers. That, along with a loss in Amazon.com (AMZN 102.41, -0.88, -0.9%), weighed on the consumer discretionary sector (-0.9%), which closed near the bottom of the pack.
The real estate (-1.0%) and utilities (-0.7%) sectors were also notably weak today.
Separately, Treasury yields pulled back after the March ISM Manufacturing Index (actual 46.3%), released at 10:00 a.m. ET, showed its fifth consecutive reading in contraction territory (i.e. sub-50%). The 2-yr Treasury note yield fell seven basis points to settle at 3.99% after hitting 4.14% overnight. The 10-yr note yield fell six basis points to 3.43% today after hitting 3.54% overnight.
- Nasdaq Composite: +16.5% YTD
- S&P 500: +7.4% YTD
- S&P Midcap 400: +3.3% YTD
- Russell 2000: +2.3% YTD
- Dow Jones Industrial Average: +1.4% YTD
Reviewing today's economic:
- The March IHS Markit Manufacturing PMI fell to 49.2 in the final reading from 49.3.
- The March ISM Manufacturing Index decreased to 46.3% (Briefing.com consensus 47.5%) from 47.7% in February. That is the lowest reading since May 2020. The dividing line between expansion and contraction is 50.0%, so the sub-50.0% reading for March reflects a general contraction in manufacturing activity for the fifth straight month.'
- The key takeaway from the report is that manufacturing activity remains in a state of contraction and at a level (46.3%) that the ISM says corresponds to a change of -0.9% in real GDP on an annualized basis based on the past relationship between the manufacturing PMI and the overall economy.
- Total construction spending declined 0.1% month-over-month in February (Briefing.com consensus 0.0%) following an upwardly revised 0.4% increase (from -0.1%) in January. Total private construction was flat month-over-month while total public construction dropped 0.2% month-over-month. On a year-over-year basis, total construction spending was up 5.2%.
- The key takeaway from the report is that new single family construction remained a weak spot (-1.8%), as higher interest rates and increased costs for labor and materials are making construction projects more expensive to finance at a time when concerns about a future economic slowdown/contraction are taking root.
Looking ahead to Tuesday, market participants will receive the February JOLTS Job Openings (prior 10.824 mln) and February Factory Orders (Briefing.com consensus -0.5%; prior -1.6%) at 10:00 a.m. ET.
Market climbing toward session highs
03-Apr-23 15:30 ET
Dow +334.90 at 33608.96, Nasdaq -50.37 at 12171.54, S&P +14.20 at 4124.78
[BRIEFING.COM] The main indices are slowly approaching their early session highs heading into the close.
The 2-yr Treasury note yield fell seven basis points to settle at 3.99% after hitting 4.14% overnight. The 10-yr note yield fell six basis points to 3.43% today after hitting 3.54% overnight.
Looking ahead to Tuesday, market participants will receive the February JOLTS Job Openings (prior 10.824 mln) and February Factory Orders (Briefing.com consensus -0.5%; prior -1.6%) at 10:00 a.m. ET.
More S&P 500 sectors trade up
03-Apr-23 15:00 ET
Dow +314.25 at 33588.31, Nasdaq -70.70 at 12151.21, S&P +9.62 at 4120.20
[BRIEFING.COM] The main indices have been tracking higher in the last half hour.
Most S&P 500 sectors have reached positive territory as the market moved higher. Real estate (-1.3%) and consumer discretionary (-1.2%) remain in last place on the leaderboard by a wide margin.
WTI crude oil futures rose 6.9% today to $80.60/bbl while natural gas futures fell 4.7% to $2.11/mmbtu.
Gold finds strength as dollar fades
03-Apr-23 14:00 ET
Dow +236.21 at 33510.27, Nasdaq -119.41 at 12102.50, S&P -3.42 at 4107.16
[BRIEFING.COM] With about two hours to go on Monday the tech-heavy Nasdaq Composite (-0.98%) is still today's top lagging major average.
Gold futures settled $14.20 higher (+0.7%) to $2,000.40/oz, aided in part by a dip in the dollar alongside weakness in treasury yields.
Meanwhile, the U.S. Dollar Index is down about -0.3% to $102.17.
Chevron, Merck aid DJIA's Monday advance
03-Apr-23 13:30 ET
Dow +255.49 at 33529.55, Nasdaq -113.04 at 12108.87, S&P +0.04 at 4110.62
[BRIEFING.COM] The Dow Jones Industrial Average (+0.77%) is near the middle of today's range, up about 255 points.
A look inside the DJIA shows that Chevron (CVX 170.18, +7.02, +4.30%), Merck (MRK 108.88, +2.49, +2.34%), and Walgreens Boots Alliance (WBA 35.37, +0.79, +2.28%) are among today's best gainers.
Meanwhile, Salesforce (CRM 196.08, -3.70, -1.85%) is at the bottom of the index.
The DJIA is now +6.7% off the mid-March bottom.
OPEC+ mixes things up to start Q2
The first quarter ended with a bang. The second quarter isn't starting with one, however -- at least not in terms of performance.
Currently, the S&P 500 futures are down five points and are trading 0.1% below fair value, the Nasdaq 100 futures are down 106 points and are trading 0.8% below fair value, and the Dow Jones Industrial Average futures are up 127 points and are trading 0.4% above fair value.
That is the look of a mixed market, which is seeing OPEC+ mix things up with a surprise announcement that it is going to cut production by about 1.16 million barrels per day starting in May and continuing through the end of the year.
This is a pre-emptive move aimed at mitigating further price declines that could result from weakening global demand. So far, so good for OPEC+: WTI crude futures are up 5.9% to $80.13 per barrel and Brent crude futures are up 5.9% to $84.56 per barrel.
An FT report, though, implies that this cut announcement could have some political undertones as Saudi Arabia was reportedly "irritated" that the Biden Administration did not purchase oil to refill the Strategic Petroleum Reserve.
In any case, oil prices -- and oil stocks -- are headed higher this morning. Dow component Chevron (CVX) is up 4.2% in pre-market trading and is playing a key role in the outperformance of the Dow Jones Industrial Average futures.
The broader market has been supported by some M&A activity highlighted by Endeavor Group's (EDR) announcement that UFC and WWE (WWE) will combine to form a $21 + billion global live sports and entertainment company and Extra Space Storage's (EXR) acquisition of Life Storage (LSI) in an all-stock transaction.
Overall, the broader market is on the softer side, keying off the weakness in the mega-cap stocks and a general sense that it may be due for a period of consolidation, having rallied 6.6% since March 13 in spite of a regional banking crisis that many pundits think will lead to a sharp economic slowdown, if not an actual recession that won't bode well for earnings prospects.
To that end, the S&P 500 starts the second quarter trading at 18.2x forward twelve-month earnings, which is a 5% premium to the 10-year historical average of 17.2x, according to FactSet.
We would suggest a valuation headwind is serving as a bit of a restraint as the second quarter gets underway along with a general wait-and-see stance in front of the March ISM Manufacturing Index at 10:00 a.m. ET and the March employment report on Friday.
-- Patrick J. O'Hare, Briefing.com
Extra Space Storage packs away huge market share gains with buyout of Life Storage (EXR)
Extra Space Storage (EXR) is making room in its property portfolio for smaller competitor Life Storage (LSI), acquiring the company in an all-stock deal that values LSI at about $12.7 bln. EXR and LSI, each of which are REITs, will combine to make the country's largest storage space rental operator with more than 3,500 locations and more than two million customers. For some context, Public Storage (PSA), which was formerly the largest company in the space before this merger, has nearly 2,900 rental space properties in the U.S.
- On that note, PSA attempted to acquire LSI in early February, offering 0.4192 shares of PSA common stock for each LSI share. At the time, that penciled out to an implied value of $126.14/share for LSI for a total equity value of approximately $11.0 bln. Two weeks later, LSI turned down the proposal, stating that the offer undervalued LSI and its growth prospects.
- The rejection opened the door for EXR to swoop in and make a more attractive offer. Specifically, LSI has agreed to accept 0.8950 shares of EXR common stock for each share of LSI owned, representing a total consideration of $145.82/share based on EXR's closing price on March 31, 2023. That's a premium of about 30% relative to LSI's closing price on February 3 -- the last trading day before PSA made its acquisition offer.
- EXR's rationale for making this acquisition isn't complicated. As the company's CEO Joseph Margolis stated, "This is an industry where scale really matters." With a larger footprint, the combined EXR/LSI will have a stronghold in many markets, making it very difficult for smaller companies to compete -- especially since it's such a commoditized industry where price really matters. Geographically, EXR is headquartered in Salt Lake City, Utah, while LSI's home base is in Buffalo, New York, providing the combined company with considerable coast-to-coast coverage.
- There's also plenty of overlap in terms of operating expenses since the businesses are so similar. EXR anticipates that the transaction will generate at least $100 mln in annual run-rate operating synergies from G&A and property operating expense savings. EXR also anticipates improved property operating revenue.
Although EXR expects the acquisition to be accretive to Core FFO within the first year of closing and to be leverage neutral, the stock is trading lower on the news. For an all-stock transaction, it's commonplace to see the acquiring company's stock trade lower. Overall, though, we believe that this deal certainly makes sense for EXR and that the combination should create significant Core FFO growth, while supporting a high dividend yield that currently sits at nearly 4% for EXR.
PPG Industries paints a rosier picture for Q1 than it did in January, lifting its shares (PPG)
Paints, coatings, and specialty materials supplier PPG Industries (PPG +4%) painted a much rosier picture in Q1 today than it initially did in late January, expecting earnings well above analyst predictions. PPG anticipates EPS of $1.52-1.58, considerably higher than its original $1.10-1.20 projection. The company noted that its operating margin recovery accelerated during the quarter due to higher sales volumes and additional selling price capture.
As has been the case for the past few quarters, aerospace and automotive end markets led the accelerated recovery in Q1. PPG noted last quarter that supply chain disruptions within the automotive industry were moderating, which, combined with a robust order book, lifted its automotive refinish volume growth in Q4. Additionally, the company commented that its aerospace business was recovering nicely despite ongoing supply chain challenges, a bullish sign for Q1. Meanwhile, PPG was optimistic that raw material costs would ease, boosting its bottom line.
However, PPG anticipated three unfavorable dynamics during Q1, causing its initially bearish outlook.
- For one, after a robust Q4 in PPG's Comex business (its architectural coatings business in Mexico and throughout Latin America), the company expected this business to experience some softness in Q1. Fortunately for PPG, the positive momentum from Q4 carried into Q1.
- Secondly, the company was building in a second COVID wave after the Chinese New Year in late January, assuming a recovery would not occur until Q2. However, the expected adverse impact from China easing lockdown restrictions was much less than PPG initially feared.
- Lastly, a similar dynamic played out in Europe, where PPG was predicting a much less favorable scenario than occurred. Typically in Q1, PPG's European business would enjoy a robust stock up ahead of the painting season but was cautious in its outlook given the economic difficulties in the region.
Overall, the tailwinds from strong order books in PPG's aerospace and automotive markets combined with a better-than-expected backdrop in Latin America, China, and Europe lifted its initially bearish Q1 earnings forecast. These factors set a bullish tone ahead of Q1 reports from peers Axalta Coating Systems (AXTA) and Sherwin-Williams (SHW), which report Q1 earnings on April 24 and 25, respectively. However, it is worth pointing out that SHW derives around 80% of its revenue from North America, whereas this region comprises around 40% of AXTA's and PPG's sales. Therefore, SHW may not benefit as much from the improving dynamics overseas as AXTA in Q1.
Tesla in reverse as investors lock in gains following solid Q1 production and delivery report (TSLA)
Tesla's (TSLA) recent price cuts in both the U.S. and China, combined with the new U.S. tax credits for electric vehicles, helped to offset the macroeconomic headwinds in Q1 as deliveries jumped by 36% yr/yr to 422,875 vehicles. That figure, which represents a new quarterly record for TSLA, slightly topped analysts' expectations and helped ease concerns that rising competition -- particularly in China -- was putting a dent into demand.
- Model 3 and Model Y were especially strong with combined deliveries of 412,180, up 40% yr/yr. Recall that in mid-January, TSLA slashed U.S. prices by as much as 20% on those models in order to qualify those vehicles for tax credits under the Inflation Reduction Act.
- In contrast, deliveries of the pricier Model S and Model X declined by about 27% yr/yr to 10,695 as TSLA implemented much smaller price reductions of 5-9% on those vehicles. Additionally, those price cuts didn't take effect until early March.
Once again, there was a sizable discrepancy between production (444,000) and deliveries (422,000) in Q1.
- When this issue first materialized a few quarters ago, it added to the mounting concerns that demand was softening, causing inventories to build up. However, now that it's clear that demand is still healthy, thanks in part to those price cuts, investors have grown more comfortable with TSLA's explanation for the gap between production and deliveries.
- Specifically, the difference is related to TSLA's transition towards a more even regional mix of vehicle builds to contend with the increasing difficulty of securing vehicle transportation at a reasonable cost.
Despite the easing concerns about demand and TSLA's solid Q1 production and delivery report, shares are still selling off today.
- The weakness is at least partially driven by a sell-the-news reaction after the stock jumped by over 6% last Friday. In fact, on a year-to-date basis, shares have soared by nearly 70%, paving the way for investors to lock in some profits.
- Worries about falling ASPs and automotive gross margin could also be playing a roll in the pull-back. TSLA is scheduled to report 1Q23 earnings on April 19 and market participants will be keeping a close eye on how its price cuts impacted margins and profitability.
- Last quarter, automotive gross margin dove by 466 bps qtr/qtr to 25.9% as the company continued to ramp up production at its new Austin, TX and Berlin, Germany plants. For Q1, gross margin is expected to plunge to about the 20% level.
Overall, though, TSLA's strategy to sacrifice margins in order to spark demand and protect market share is playing out quite well for the company. In the long run, marking its vehicles more affordable and expanding its target market will be key to achieving its ultimate goal of 20 mln in annual deliveries.
World Wrestling and Endeavor Group (EDR) to be a new heavyweight in the entertainment industry (WWE)
World Wrestling (WWE -5%) looks to form a new heavyweight by combining with Endeavor Group (EDR -2%), the company that owns the mixed-martial arts league UFC, in a transaction worth over $21.0 bln. The two companies will merge to form a live sports and entertainment powerhouse under a new name (not yet determined) and trade under the ticker symbol "TKO." Upon close, expected sometime during 2H23, EDR will hold a 51% controlling interest in the new company, and WWE shareholders will own a 49% interest.
Although both companies are seeing their share price slide on the news, WWE is amid a much more pronounced sell-off. In fact, WWE's four straight days of gains are being wiped out today. With Chairman Vince McMahon exploring strategic alternatives since returning in early January, investors were optimistic that the founder's son would find a lucrative deal for the company, evidenced by shares popping by over 20% the day he returned. Since WWE is combining with another firm instead of selling, shareholders are dissatisfied.
However, despite the adverse reaction, we think the combination will benefit both organizations' shareholders.
- Even though a key difference separates the two companies, with EDR engaging in unscripted events while WWE hosting the opposite, both firms have overlapping fan bases. In fact, each company knows how to market itself and expand its audiences and can now tap into each other's expertise on the subject.
- For example, it is no small feat that WWE has remained highly entertaining despite viewers knowing that the outcome has already been predetermined. Its success can be seen in growing revenue by 10% annually over the past five years, reaching over a billion in sales in FY21. WWE also expanded its top line during FY20, a testament to its fluidity as it never missed a week in producing content during the pandemic.
- EDR has shared similar success, improving its revenue by nearly 8% annually over the past five years, rebounding mightily from FY20 with over $5.0 bln in revenue in FY21, an 11% jump from FY19. EDR is also estimated to grow sales by nearly 12% in FY22, a significant leap over WWE, which is forecasted to grow by just 4%. Also, when looking at just UFC, the league has almost doubled its revenue over the past seven years.
- A merger will also greatly enhance the companies' media rights. It is worth noting that outside of running live sports leagues, EDR is also one of the largest global distributors of entertainment programming, selling media rights on behalf of over 150 clients, like the NFL, NHL, and NBA. This positioning should benefit WWE, whose negotiations with the FOX and USA networks are slated for this year.
Bottom line, merging with EDR to form a new public company may not have been what WWE shareholders had in mind when Vince McMahon returned earlier this year. However, the combination of EDR and WWE is a heavyweight, projecting $50-100 mln in annualized run rate cost synergies, which will have more strength when negotiating media contracts, garnering sponsorships, and expanding its fan base.
Generac shares are struggling to kick on after receiving a downgrade from BofA Securities (GNRC)
Generac (GNRC -4%) is struggling to kickstart its shares today after receiving a downgrade to "Underperform" from BofA Securities. The stock has hovered around the $110 mark for most of the year, quickly pulling back after gapping higher on decent Q4 earnings results in mid-February.
Briefing.com notes that as the nation's largest manufacturer of generators by far, boasting a 75% market share in home standby generators, GNRC is a formidable opponent in this field. However, on the flip side, it also means that its business heavily depends on power outages. Since this leads to volatility as storms and other weather-related disruptions can ignite short-lived demand, GNRC has been diversifying into another field: clean energy. Given that it is a relatively new player in this industry (it entered around 2019), there are heightened risks worth considering.
- Much of GNRC's strategy has been to grow through acquisitions, particularly within the residential clean energy space, such as its purchase of Chilicon Power in July 2021. GNRC has not let up on its M&A activity either, purchasing ecobee Inc. in late 2021 and many others like Blue Pillar in 2022 and REFU Storage Systems GmbH last month. With so many acquisitions comes the hurdle of seamlessly merging all their offerings under one umbrella.
- It is also no guarantee that these investments will pay off. GNRC noted last month that it was making healthy progress toward its next-gen energy storage system, beginning alpha testing in Q2 for a market launch in 2024. However, with clean energy product shipments lower in Q4, market demand may be waning, especially as macroeconomic pressures, like inflation, continue to hang over the economy.
- Meanwhile, the competitive landscape in the clean energy space is much greater than in the home standby market. For example, GNRC is competing against a long-standing player in this field in Enphase Energy (ENPH).
Still, GNRC is amid long-term tailwinds. Utility rates continue to increase, spurring more consumers to ponder solar plus storage options. Also, the electrification of many household appliances, from cars to HVAC systems, places more reliance on always having electricity. It is also worth mentioning that telecoms' 5G rollouts should provide substantial benefits for GNRC as this infrastructure depends on always being on.
Bottom line, GNRC still commands a strong leadership position in the home standby generator market, which will help cushion against a severe market downturn. The company also possesses plenty of opportunities over the long term. However, shifting away from its dependence on gasoline-powered generators toward more clean energy alternatives may not be a smooth transition, especially given the competitive landscape.
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